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Rotten apples and sterling examples: moral reasoning and peer influences on honesty in managerial reporting


Steven Huddart and Hong Qu

We examine how observing a sequence of peers' actions affects one's own actions, and how such social influences depend on moral reasoning. In a budget reporting experiment, subjects become less honest after seeing a less honest peer and more honest after seeing a more honest peer, on average. Pre-conventional types, who are self-interested, decrease their honesty most; only conventional types, who strive to conform, increase their honesty. Because the reaction to less-honest peers is stronger and more pervasive, social influences erode honesty, on average. Results further suggest that sensitivity to external norms is correlated with internal standards.

Working paper

JEL Classification: C72, D03, J44, M41, M55

Keywords: Financial incentives, Non-financial incentives, Compensation, Earnings management, honesty, dishonesty, peer effects, social norms, social preference

This draft: November, 2012

Download the paper from SSRN.


Steven Huddart
Smeal College of Business, Penn State University, University Park, PA 16802-3603 USA
(814) 863-0048
huddart@psu.edu
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